Is The Fed Playing Where’s Waldo With The Economy?

That is the question I pondered on Friday as I settled in for a long weekend at a lake house outside of Cooperstown, New York. As the Fed nudges the Fed Rate higher at what point will consumers expect a greater return for placing their deposits with you? Or as the WSJ put it in this great article ” For now, most bankers are happy to keep deposit yields low, standing pat even as the Federal Reserve hikes short-term rates. No one is sure, though, how long customers will tolerate that.”

The chart accompanying this blog (which I created using the FRED website) demonstrates that something really strange is going on here: on the one hand employment is that a 16 year low; on the other hand inflation has Hardly nudged and wage growth has been anemic. Not surprisingly interest rates on 12 month certificates of deposit are flat.

History says it’s not supposed to be this way. After all, the Fed has gradually been raising rates and has signaled that it intends to start selling all those mortgage back securities back into the economy, but despite impressive job gains we haven’t seen the type of upward pressure on wages that would make raising rates the logical thing for your credit union and the Fed to do The WSJ reported that from a year earlier, average hourly earnings increased 2.5%, in July thanks to a 9 cents-an-hour increase from the prior month. That is slower than normal in the past quarter. In fact, one of the reasons the market is booming is because it’s the only place persons planning for retirement can make any money off their money.

Which brings us back to Where’s Waldo? If you read their analysis or listen to their interviews economists are convinced that inflation is hiding out there somewhere, they just haven’t looked in the right place yet. Conventional wisdom says they are right but if they are wrong than we aren’t anywhere near the point yet where the Fed should raise rates again or your members will demand a higher return on their deposits